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Searching out shareholder value

After riding roughshod over the needs of legitimate stakeholders in the name of maximising sharehold...

After riding roughshod over the needs of legitimate stakeholders in the name of maximising shareholder value, the mantra of corporate America in the 1980s and 1990s, US firms now face an uncertain future.

That at least is the opinion expressed by US management consultant Allan Kennedy in his latest book.

In The End of Shareholder Value, Kennedy argues that the laudable aims which saw the concept of shareholder value emerge in the early 1980s have turned into a farce of short-termism which has damaged corporate America's future.

In the name of driving stock prices skywards, many US companies have, Kennedy claims, alienated and driven away customers, frittered away skilled and experienced staff and cut back on research and development budgets.

To remedy these ills in the heart of America business, Kennedy preaches a move away from the aim of driving up stock prices, largely influenced by boards of executives holding large share-options as part of their pay packages, and towards what he calls wealth building and sharing, a process focusing on creating lasting wealth. Kennedy, who has published two previous titles on US corporate culture, begins by describing the birth of the concept of shareholder value which originated in academic accountancy circles in the late 1970s.

The concept soon came to the notice of a new generation of aggressive American investment bankers, who launched a tidal wave of raids on companies whose stock appeared undervalued in the market.

Once acquired the firms were brutally restructured to release hidden reserves of value, then sold at a profit to new owners.

The threat of such action caused a revolution in executive boards which reacted by mimicking the raiders' actions to stave off hostile takeovers. In the 1980s this saw an increase in stock options among executives, restructuring, pruning of underperforming arms of businesses, cost-cutting, closing capacity, outsourcing, moving production to cheaper overseas locations.

Initially these moves produced enhanced stock performance and profitability, however the valuable contribution that the shareholder value ethos added became a self-sustaining force as executives came to see their ambition for personal wealth as a legitimate aim in itself.

In Kennedy's words: "By the end of the 1990s, shareholder value had turned into a farce. It had become short-termism, coupled with an extant view that getting as much as you can as quickly as you can is an acceptable modus operandi in the world of commerce.

"If you have any doubt that this is what happened, just look at the rationale behind many of the dot.com start-ups rushed into the stock market in the closing years of the twentieth century."

The effect of this culture is, Kennedy argues, devastating to US business, having wasted huge amounts of potential that could have been turned into long term profits.

Examples of this short-termism are the shedding of the intellectual capital of long-retained and loyal staff, the dropping of old and trusted product lines, and the breakneck rush to drain every penny from customers' pockets.

This he says has eroded customer loyalty and added to the enthusiasm with which they have flocked to the internet. It has also destroyed the culture of staff loyalty, which has been replaced by a similar self-promoting ethos to the executive strategies that brought it on.

It is also seen in the brutal demands put on suppliers, who Kennedy says, have circled wagons and in many cases now hold the balance of power over their customers.

In short the winds of change are blowing and, according to Kennedy, a new corporate business model needs to be found.

Kennedy believes a switch from shareholder value to wealth creation would eradicate almost all the corporate abuses which have crept into the system since the 1980s.

The End of Shareholder Value is published by Orion Business Books and costs £18.99.